Death But No Taxes: How Guatemala’s Elite Foster Crime, Impunity

A formidable combination of weak state institutions, powerful economic elites and high-level corruption has kept tax rates exceedingly low for Guatemala’s wealthy, depriving the government of the resources needed to combat crime and reduce impunity.

A Toothless Tax System

Death and taxes are life’s only certainties, Benjamin Franklin once famously said. But the 18th century Renaissance man never went to Guatemala.

The normal rules don’t seem to apply in Guatemala, at least not for the political and economic elite. Tax revenue represented just 10.8 percent of Guatemala’s Gross Domestic Product in 2012, according to the World Bank, the lowest such percentage of any Latin American country that reported data.

Guatemala’s tax system is also highly regressive, meaning most of the tax burden falls on consumers instead of the wealthy. According to a 2014 Wilson Center report (pdf), more than 65 percent of all tax revenue in Guatemala comes from indirect taxes like the Value Added Tax and excises, while less than 35 percent is generated from direct taxes, such as on income.

“At least in part, [the government] is not going after where the money really is,” says Aaron Schneider, a professor at the University of Denver and co-author of the Wilson Center report. “The few taxes that they collect, they collect through consumption and turnover taxes and excises and things that tend to fall on poorer people more than rich people.”

What’s curious is that, on paper at least, Guatemala has fairly robust tax rates on the wealthy. The country’s top individual income and corporate tax rates are at 31 percent, according to the Heritage Foundation’s 2016 Index of Economic Freedom. Those are equal to or higher than the rates in many other Latin America countries, including neighboring Honduras and El Salvador.

But in Guatemala, it’s important to distinguish between the letter of the law and the de facto law of the land.

“The rates established by law for taxes in Guatemala are not exactly low,” Ricardo Barrientos, a senior economist at the Central American Institute of Fiscal Studies (Instituto Centroamericano de Estudios Fiscales – Icefi), told InSight Crime. “The rates are above the average of many other countries. What is low is the collection.”

Barrientos noted two major reasons for why Guatemala doesn’t collect more taxes: evasion and loopholes. There are almost no legal repercussions for tax evasion, the Wilson Center report explains, because of the country’s weak and inefficient tax administration.

The loopholes, meanwhile, are largely the product of the economic elite’s influence over the political system.

“Economic actors are constantly looking for ways to build in exemptions and privileges and special regimes into the tax system so that they pay less or have a tax holiday for their economic activities,” Schneider told InSight Crime.

The most important economic entity in Guatemala is the Coordinating Committee of Agricultural, Commercial, Industrial, and Financial Associations (Comité de Asociaciones Agrícolas, Comerciales, Industriales y Financieras – CACIF). The business association, Schneider says, routinely blocks attempts to raise taxes that could benefit one business group at the expense of another. The CACIF essentially acts as the peace keeper for a politically and socially fragmented economic class that represents a diverse set of interests.

“CACIF doesn’t do as much work coordinating elite interests to advance an agenda as it does the work of ensuring that no single interest can dominate,” Schneider said. “They are as much a veto actor as they are a proactive agenda-setter.”

Government corruption also robs the state of would-be tax revenue. Last year, for example, the Public Ministry (as the Attorney General’s Office is known in Guatemala) and the United Nations-backed International Commission Against Impunity in Guatemala (Comisión Internacional Contra la Impunidad en Guatemala – CICIG) uncovered a massive fraud ring within the country’s customs office. Allegedly run by then-President Otto Pérez Molina and Vice President Roxanna Baldetti, the network known as “La Linea” (The Line) systematically lowered taxes on importers in exchange for personal kickbacks. The group is believed to have earned roughly $328,000 per week via this scheme alone.

Underfunded Criminal Justice System Adds to Security Woes

So, what do low taxes have to do with organized crime? As it turns out, quite a bit.

Organized crime tends to flourish in countries where state institutions are weak and easily corruptible. This axiom is a corollary to what is known in law enforcement parlance as the “balloon effect” — if security forces put the squeeze on criminal groups in one area, these groups will migrate to an area where there is less pressure.

Even in a region where weak and corrupt state institutions are considered the norm rather than the exception, Guatemala stands out. Both Baldetti and Pérez Molina are now in jail awaiting trial on corruption-related charges. And more than a year after the La Linea scandal first broke, prosecutors continue to uncover corruption rings that were embedded in the Pérez Molina administration. Attorney General Thelma Aldana, whose appointment by Pérez Molina in May 2014 was initially met with a great deal of skepticism among anti-corruption activists, recently likened the former president to a mafia boss.

Deep-rooted corruption isn’t the only thing eating away at the integrity of Guatemala’s state institutions. As the aformentioned Wilson Center report shows, Guatemala’s political parties are ephemeral and subject to high levels of volatility. According to the report, nearly half of the country’s 158 congressional representatives lost their seat in four of the five elections from 1995 to 2011. Party loyalty is also weak; between 2008 and 2011, 100 of the 158 representatives switched parties.

The fragile coalitions that are built following each new election cycle, Schneider says, quickly disintegrate when consensus is needed on national issues such as tax reform.

“Any time there is a proposal to build state capacity by raising revenues, there is an immediate breaking apart of political coalitions and the economic actors who support the political factions as they all try to poke holes in whatever kind of agreement was set to raise taxes,” he said.

It’s possible that under normal circumstances, structural corruption and a feeble political system wouldn’t doom a country’s security chances. But Guatemala happens to be situated along the principal route for illicit drugs heading from South America to the United States. Along with the transnational drug trafficking groups that have alighted in Guatemala, the Central American nation is also home to the violent MS13 and Barrio 18 street gangs.

There is widespread recognition that low taxes and a resource-deprived state apparatus are contributing to Guatemala’s chronic security and justice problems.

“There’s not enough money to go around to pay for decent security and a judicial system that can deal with the kind of pressures Guatemala faces,” Schneider said.

Barrientos echoed that sentiment. “A government…with a tax rate of 10 percent cannot finance a system and a justice administration that functions well,” he said.

Last November, Velásquez indicated that Guatemala will only tackle widespread impunity for violent crime when the country dedicates greater resources to prosecutor’s offices, judges and the courts system.

Change on the Horizon?

In October 2015, former TV comedian Jimmy Morales rode a wave of public discontent to a landslide victory in Guatemala’s presidential election. Although his status as a political neophyte helped him win the election, it has hindered his ability to build a coalition around issues like tax reform.

“He presented himself as an outsider, but that meant that the party organization that he brought into power had very few connections and deep alliances with other parties,” Schneider told InSight Crime.

Barrientos was more blunt. “Jimmy Morales is [running] perhaps the weakest government in the last 40 years.”

According to Schneider, a president generally has the best chance at tax reform during the early part of his administration, when he has the greatest amount of political capital and his coalition is the strongest. Morales, however, has yet to capitalize on whatever slim chance he might have at tax reform.

“While he did patch together a coalition immediately on entering the presidency, I forsee that coalition falling apart before he ever gets around to anything on tax,” Schneider said.

Even though Morales is less than a year into his presidential term, the window of opportunity on tax reform is rapidly closing. It’s tough to see how Morales could build a coalition centered on reforming the tax code before it slams shut for good.

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